The size of the government’s claims against a firm is set by statute without regard to the firm’s capital structure and, in particular, without regard to any security interests the firm may have created that subordinate the government’s claims to those of secured creditors. Thus the government is nonadjusting with respect to the creation of security interests by the firm. That is, when a borrower and a creditor must decide whether to create a security interest, the borrower will treat its obligations to the government—like its obligations to tort creditors—as fixed, and knows that it can “sell” bankruptcy value that would otherwise go to pay government claims to the creditor in exchange for a lower interest rate.

During the Symposium, Steve Harris and Alan Schwartz argued that the government should not be considered nonadjusting because it has the power not only to change the tax laws so that its claims are “adjusted” for the creation of security interests, but also to change bankruptcy law so that its claims take priority over those of any other creditor. However, the ability (in principle) of the government to become an adjusting creditor is irrelevant. We are not arguing that government claims are inherently nonadjusting. Nor are we arguing that the government is victimized because it does not adjust.

Rather, we are simply pointing out that the government currently does not adjust its claims to take into account the effect on those claims of the creation of security interests which, under full priority, have the effect of subordinating those claims. Thus, when a borrower is considering the creation of a security interest giving the secured creditor priority, it knows that it can lower its overall interest burden by “selling” some of the bankruptcy value that would otherwise go to the government in exchange for lower interest payments.